New Rules Offer Some Hope to Mall Owners

A shopping-mall development boom during India's go-go years has left Mumbai, New Delhi and other major cities with a glut of retail space that owners have been struggling to fill.

Now, hope may be on the way in the form of new government rules making it easier for international retailers to set up shop in India.

ENLARGE

Business wasn't booming last week at the MGF Metropolitan Mall in Saket, New Delhi.
Sanjay Austa for The Wall Street Journal

In September, India allowed foreign companies to own up to 51% of stores that sell a wide variety of products, like clothes, electronics and items for the home. The long-awaited move would allow companies such as Wal-Mart Stores Inc.,WMT-0.25%TescoTSCDY0.50% PLC and Carrefour SACRRFY0.90% to set up outlets in India.

Owners of empty retail space also received good news earlier this year when the government made it easier for single-brand companies to open stores in India by allowing 100% foreign ownership. Before the change, companies like Marks and Spencer GroupMAKSY2.17% PLC and Burberry GroupBURBY3.37% PLC could set up outlets as long as they were 49% owned by a local partner.

"Foreign direct investment will bolster our revenues," said Rajendra Kalkar, a manager at Phoenix Mills Ltd.EQPHOENIXLTD0.87%, a real-estate firm in Mumbai that operates four malls. The change in government regulation "is a very good move" he added.

"This would certainly spur the growth of commercial real estate in the metros, which has remained sluggish in the recent past, and we welcome the move," said a spokesperson of EmaarMGF Land Ltd., a Delhi based real-estate firm with seven malls in India.

To be sure, it will take months if not years for the looser rules to be felt by many owners. Meanwhile, malls that are developed "in inferior locations with bad design will still not find takers even if the market booms," said Gulam Zia, head of the retail division at Knight Frank India Pvt., a property consultant.

But the queue of foreign retailers is getting longer. Last month, Swedish furniture retailer IKEA received approval for a $1.9 billion investment in the country. In October, U.K.-based footwear company Pavers England became the first to win government approval to set up wholly owned stores in India.

Fossil Inc.,FOSL-0.33% a U.S.-based company that makes watches, jewelry and clothing, also had applied to the government for setting up its own stores. It is awaiting government approval and hopes to set up stores by 2013, according to Vasant Nangia, managing director of Fossil India Pvt.

And StarbucksSBUX-0.22% opened its first store in India, in Mumbai, in October, as a joint venture with India's Tata Group. Starbucks officials have said previously that they would consider setting up stores in shopping malls as the company expands its presence in India. The firm "will invest over time based on the demands of the business and the requirements of our customers to build a strong presence in India," said Avani Saglani Davda, chief executive of Tata Starbucks Ltd.

Shopping malls are a relatively new concept in India. People traditionally went to their neighborhood market or central bazaars to buy everything from groceries to clothes.

The development surge started about a decade ago after India's economic growth surpassed 8% and disposable income was rising. Shopping malls, with their air-conditioning, escalators and swanky shops, were for millions of people the first taste of the developed world.

Around 200 malls currently are operating in major Indian cities such as Mumbai, Delhi, Bangalore and Kolkata, according to real-estate firm C.B. Richard Ellis South Asia Pvt. With the advent of malls, the Indian middle class, for the first time, got easy access to international brands, like German sportswear-maker Puma AGPMMAF4.79% and Italian apparel company United Colors of Benetton. These malls also have stores from Indian brands such as Fabindia, which makes garments and handmade products, and Indian ethnic-wear maker Meena Bazaar.

But shopping-mall developers have struggled in the past three to four years, as India's economy has slowed amid high interest rates. Fitch Ratings on Monday said it expects India to expand at about 6% in the current financial year through March. This compares to growth of 8.4% for 2010-2011.

Analysts say many mall builders didn't have a workable business model. They only focused on getting retailers but didn't realize that customers needed good food and entertainment options to keep coming back even after the novelty of shopping malls waned, said Anshul Jain, chief executive of DTZ India Pvt, a real-estate consultant.

In Delhi and adjoining areas, the vacancy rate in shopping malls is around 30%, while in Mumbai it is 16%, according to real-estate consultant Cushman & Wakefield India.

In a bid to survive, some malls have changed their strategies.

Delhi-based Star City Mall, founded in 2006, converted to office space in 2010. The mall didn't have a movie theater, which was one of the reasons for its downfall, said R.K. Mahatta, managing director of Mahatta Towers Pvt., the developer of the mall. The company didn't receive regulatory approval for a theater. One of its most-important tenants, Reliance Retail, a supermarket, has left the mall. "They vanished because they didn't do well and once they didn't do well, everyone else also vanished," Mr. Mahatta added.

Full Stop Mall, based in Mumbai's suburb of Vashi, was built three years ago but hardly has any occupants. Some of its space is currently being used for offices. "We are searching for retailers," says Ashwin Vora, head of marketing at Bhumiraj Group, which built Full Stop. He added that they are now hoping foreign investment in the retail sector could help generate interest in the mall.

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